Soros Got It Right

George Soros has cried wolf on the economy twice in the past three decades. Earlier this year he cried wolf again, and as he noted the third time the boy cried wolf, there really was a wolf (see George Soros Goes Bubblicious).
This time, Soros looks to have been right, and his Superbubble theory vindicated (see George Soros Puts the Bite on Markets). As John Cassidy notes in He Foresaw the End of an Era, Soros correctly called the collapse of this bubble, that the government would have to use taxpayer money to address the housing crisis, that markets can self-reinforce on the way down just like they do on the way up (hence the belief that home prices couldn't fall), and that more government regulation was needed.

He also called the end of the Thatcher/Reagan era, which looks likely, though we're in the middle of it and who's to say. With it goes U.S. economic dominance.

Cassidy's discussion of Soros, which covers all three of his books, though it is focused primarily on "The New Paradigm for Financial Markets," includes this lovely dicusssion of what financial markets do:

1) they take money from those with no immediate use for it, such as people saving for retirement and the hereditary rich, and put it into the hands of firms and entrepreneurial individuals with productive investment ideas but a shortage of cash to finance them; 2) they allow individuals and institutions to reapportion risk to those more willing to bear it.

What Cassidy doesn't say so bluntly is that the second part means markets can take on a casino-like aspect, where every game is a form of blackjack and the players all think they can count cards.

Cassidy also lucidly sums up Soros' argument on why a superbubble emerged from the merely ordinary housing bubble:

globalization (the normal meaning of the word, plus the U.S.'s emergence as the world's largest debtor)

credit expansion

deregulation

As Cassidy writes, Soros has some good news, too -- in his book, he says the developing world will continue to boom, and the international banking system will not collapse. We can all hope he's right about that.

By the way,Here's a recent interview with Soros in which he bashes economic theory for mimicking physics, especially in its theory of equilibrium. Soros notes that standard economic theory fails to account for human behavior, which is different from how molecules and atoms behave.

Michael Fitzgerald writes about innovation and other big ideas in business for publications like the New York Times, The Economist, Fast Company, Inc. and CIO. He’s worked as a writer or editor at Red Herring, ZDNet, TechTV and Computerworld, and has received numerous awards as a writer and editor. Most recently, his piece on the hacker collective the l0pht won the 2008 award for best trade piece from the American Society of Journalists and Authors. He was also a 2007 Templeton-Cambridge Journalism Fellow in Science and Religion.